The balance sheet as of December 31, 1997, for Boyton Sons follows. Assets Liabilities and Stockholders’ Equity Current assets $ 40,000 Current liabilities $ 30,000 Noncurrent assets 80,000 Long-term liabilities 60,000 Stockholders’ equity 30,000 Total liabilities and Total assets $ 120,000 stockholders’ equity $120,000 The company needs capital to finance operations and purchase new equipment. Boyton is not certain how much money it will need and is considering one of the following three-year notes payable. Each note would mature on January 1, 2001. (A) Face value = $50,000 Stated interest rate = 0% Proceeds = $37,566 (B) Face value = $50,000 Stated interest rate = 10%* Proceeds = $50,000 (C) Face value = $50,000 Stated interest rate = 6%* Proceeds = $45,027 interest paid annually. REQUIRED:

a. Determine the effective interest rate of each note.

b. Compute the amounts that would complete the following table. Interest Expense (A) Interest Expense (B) Interest Expense (C) Year 1 Year 2 Year 3

c. Assume that Boyton can earn a 12% return on the borrowed money and that it reinvests all interest that it earns. Compute the annual income (return — interest expense) generated from each of the three notes.

d. Compute the amounts that would complete the following chart. (Hint: Consider the effect of annual income from

(c) on stockholders’ equity as well as the new debt.) Debt/Equity (A) Debt/Equity (B) Debt/Equity (C) 12/31/98 12/31/99 12/31/2000

e. Discuss some of the trade-offs involved in choosing among the three notes